By Byun Duk-keun SEOUL, July 29 (Yonhap) -- Tension between the South Korean government and large businesses is coming to a head following the Lee Myung-bak administration's announcement of plans to crack down on their "illegal or unfair" business practices.

The conflict intensified as President Lee, a businessman-turned-politician, fired a broadside a week ago at conglomerates known here as chaebol, saying they are failing to fulfill their social responsibility.

"When an economy grows, the country's economic disparity should narrow, not widen, but we are not seeing such a change, so (the large businesses) must do more to narrow the gap," the president said.

The unusual barb by Lee, which some watchers regard as the latest case of chaebol-bashing, came as a surprise to the local business community because they had largely been on the same wavelength as the pro-business government.

Lee's remark infuriated conglomerates, prompting the head of the country's biggest chaebol lobby to hit back on Wednesday.

Cho Suck-rai, chairman of the Federation of Korean Industries (FKI), stopped short of telling the government to mind its own business, but said the government has failed to fulfill its own duties.

"If a country is to move ahead on the right track, its government and political circle must take a balanced initiative and clearly suggest where and how the country must move forward in the future," Cho said in a speech read by FKI vice chairman Jung Byung-chul on his behalf at the opening of an annual FKI forum on the country's southernmost resort island of Jeju.

The FKI head went on to accuse the government of failing to warn its citizens of security threats that have materialized in the aftermath of the March 26 sinking of a South Korean warship, the Cheonan, by North Korea that left 46 young sailors dead.

"Our country is currently facing many difficulties here and abroad ... but the government is unable to even warn the people of dangers facing the nation," he said.

The FKI later tried to play down the impact of the remarks in a released statement, saying they were just a call for national unity in a time of difficulties.

Many observers, however, believe they were part of a direct retort against the government's recent attack. They said the remarks also marked the first time the FKI or its leadership publicly criticized the government since Lee took office in February 2008.

"Large businesses may have been very upset with the government because they feel they have actively supported all government policies, even the ones they thought were politically motivated," an observer said, asking not to be identified.

President Lee, apparently offended by Cho's remarks, spoke out Thursday, calling them an attempt to protect only the interests of the rich. "The FKI, too, must not protect the interests of large conglomerates only and must start thinking about their social responsibilities," Lee said at a weekly economic policy meeting. At first, the conglomerates responded positively, as they have in many previous cases, vowing to increase their payrolls by an additional 10 percent from originally planned.

The government, however, didn't back down.

The Fair Trade Commission formed a special task force last week to look into what it called "unfair" business transactions between large conglomerates and their small suppliers while the National Tax Service earlier said it will increase the number of businesses subject to tax audits by some 30 percent from about 2,700 last year.

The prosecution is also said to be gearing up for an intensive investigation into businesses as it recently reinforced the staff of the Central Investigation Department at the Supreme Prosecutors' Office, which mainly deals with high-profile corruption scandals involving large businesses.

The country's small and medium enterprises, mostly suppliers to chaebol, seem to be pleased with the government's moves as they feel large companies ride roughshod over them.

Kim Dong-sun, head of the Small and Medium Business Administration, said Wednesday that large businesses were using their positions to force their suppliers into what he called "unfair" business deals.

"Statistics show the gap between the profitability of large businesses and that of small and medium enterprises has worsened," he said. "We have many subcontractors who say they can no longer keep their businesses, and we urgently need plans to help save them."

Market watchers, meanwhile, have voiced concerns that if the clash between the government and large businesses continues, it will likely hamper the economy's upward movement, though it may not turn the tide for the worse.

Conglomerates account for a large share of the country's economic growth. The South Korean economy, Asia's fourth largest, is expected to grow nearly 6 percent this year, showing one of the strongest recoveries in the region from the global financial crisis.